Marketing Analytics: Target Return$-$on$-$Investment Pricing

Aizan opened a small business a year ago manufacturing customized golf walking bags. The bags, which are used to hold golf clubs, are manufactured with durable high$-$end fabrics and choice of custom designs, targeted at the golfer who appreciates both style and function. Aizan invested $$100,000$ of his savings to start his business with a goal of earning a $15$ percent return$-$on$-$investment. Unfortunately, after the first year of business, Aizan fell short of his goal, achieving only a $13$ percent return$-$on$-$investment. To attract additional investors to and expand his business in the future Aizan knows he must be able to provide a $15$ percent return$-$on$-$investment.

Over the past year, Aizan conducted a great deal of marketing research to collect data on consumer price sensitivity$,$ demand, and response to marketing activities for his target market. Using his understanding of return$-$on$-$investment pricing and research findings, he constructed a simple spreadsheet to project operating statements for the upcoming year.

Aizan is evaluating four potential marketing mixes for next year, each with its own strength and weakness. Although manufacturing costs are expected to increase by $20$ percent next year, Aizan negotiated a price break from his supplier that reduces this increase to $10$ percent if his volume reaches $5500$ units. Aizan discovered that he could charge the highest price for his product if he used magazine advertising to reposition his product as a luxury good, but that consumer demand increased more with direct mail, free $30-$day trial offers, or social media campaigns. However, each of those strategies was only effective at a price point lower than $$100.$

The goal of this activity is to understand how target return$-$on$-$investment pricing can be calculated using an operating statement. Keep in mind that:

Return on investment $=$ Net profit after taxes$/$Investment$.$

Use the formulas above and the spreadsheet below to help answer the questions that follow. The spreadsheet fields highlighted in yellow can be changed in order to determine possible outcomes. You can find the initial values in the corresponding blue cells in columns G to J$.$ Start by entering the initial values into columns B to E$.$ Then review the questions below and adjust the values in columns B to E to determine the correct answers.